Analysis of US Stock IPOs | Continuously incurring losses and high debt, Zhongchi Carfu is "overwhelmed" in intense market competition

Since 2024, competition in China's automotive market has further intensified. Domestic car brands are launching new cars, attracting traffic, and boosting sales, each showcasing their strengths. Correspondingly, traditional luxury car brands BBA are facing a major defeat, with prices dropping one after another, while dealership stores are continuously shrinking.

Faced with intense market competition, companies in the automotive industry are accelerating their entry into the capital market to seek new support. This includes multiple new forces in car manufacturing and other players in the industry chain, such as the recently listed on the Hong Kong stock market Auto Street (02443), the tech company Guanglian Technology (02531) currently in the IPO stage, the recently submitted to the Hong Kong Stock Exchange Botai Car Networking, and the journey to the U.S. stock market Zhongchi Car Fu.

However, Zhongchi Car Fu's journey to the U.S. has been quite tortuous. On July 7, 2023, it first submitted a public version of the prospectus to the SEC, and to this day, it has not yet completed its listing after a year. The fundraising scale of Zhongchi Car Fu has changed several times.

In August 2023, Zhongchi Car Fu expressed its intention to raise $23 million, but by April of this year, it revised its IPO terms, planning to issue 1.3 million shares at a price of $4 to $5 per share, significantly reducing the fundraising amount to $6 million. However, by June, Zhongchi Car Fu increased the number of shares to be issued to 2.5 million, raising the fundraising amount to $11 million, but still significantly lower than the initial planned fundraising amount, which was "halved."

The continuous changes in fundraising scale may indirectly indicate that Zhongchi Car Fu's listing in the U.S. is not going smoothly. If a deep analysis of Zhongchi Car Fu's fundamentals is based on the prospectus, this situation would not be surprising.

Parallel Imported Car Sales as Core Business

Established in 2010, Zhongchi Car Fu is an early entrant in the domestic industry Internet field, focusing on digital services in the automotive industry supply chain. So far, Zhongchi Car Fu has built a business model of end-to-end supply chain digital services based on S2B2C. Through its online supply chain cloud platform, SaaS platform, and MBS store network, it has connected and empowered a wide range of entities in the industry chain, including OEMs, parts factories, insurance companies, MBS stores, and car owners, forming an ecosystem of automotive full-life service.

In this ecosystem, OEMs, auto parts manufacturers, and insurance companies act as "suppliers," MBS stores and car owners as "merchants," while Zhongchi Car Fu plays the role of intermediary, connecting the various parties and optimizing the process synchronization and efficiency between the transaction entities in the automotive supply chain and service chain, benefiting from activities such as product procurement, ordering and payment, inventory control, logistics, and fulfillment management.

According to the prospectus, as of September 30, 2023, the participants registered on the Zhongchi Chefu Cloud Platform include 3,409 auto parts manufacturers, 17,244 auto parts dealers or resellers, 79,279 stores, and 77 insurance companies. At the same time, Zhongchi Chefu's MBS authorized stores number 252, covering 17 cities in 5 provinces nationwide, mainly located in third and fourth-tier cities and rural areas.

In terms of business structure, Zhongchi Chefu currently has three main sources of revenue: new car sales, auto parts and accessories sales, and automotive insurance-related services. In the 2023 fiscal year (12 months ending September 30), the revenue distribution of these three main businesses for Zhongchi Chefu was 65%, 32.4%, and 2.6% respectively.

Clearly, new car sales are the core business of Zhongchi Chefu, which includes parallel imported car sales and new energy vehicle sales, with revenue distribution in the 2023 fiscal year of 64.1% and 0.9% respectively. In auto parts and accessories sales, lubricant sales account for the majority, with revenue distribution in the 2023 fiscal year at 29.5%, tire revenue at 1.3%, and battery revenue at 1.5%.

In terms of revenue, Zhongchi Chefu's revenue for the 2023 fiscal year is approximately $114 million, a 5.7% year-on-year decrease. Among them, auto parts and accessories sales revenue decreased by 5.6%, mainly due to exchange rate fluctuations and the expiration of cooperation with some customers; automotive insurance-related services revenue plummeted by 64.1% year-on-year, mainly due to a decrease in business volume and some stores being affected by the epidemic.

New car sales revenue increased by 1%, mainly because the company focused more on high-priced luxury parallel imported cars to cope with market competition. The increase in unit price offset the decrease in sales volume, stabilizing the revenue scale. In the 2023 fiscal year, parallel imported car sales decreased by 42 units to 586 units, and new energy vehicle sales decreased by 128 units to 73 units. Due to tight cash flow in the second half of the year, Zhongchi Chefu temporarily suspended the sale of new energy vehicles.

In terms of gross profit margin, Zhongchi Chefu's gross profit margin for the 2022 and 2023 fiscal years was 0.6% and 0.4% respectively. This is mainly due to the long-term intense competition in the parallel imported car and lubricant sales markets. To attract customers and expand market share, Zhongchi Chefu strategically set a relatively low gross profit margin. In the 2023 fiscal year, the gross profit margin for new car sales at Zhongchi Chefu was 0%, meaning this business is close to the margin of loss Due to the overall decline in revenue and the decrease in gross profit margin, coupled with a significant increase of 45.5% in total operating expenses, this has led to a 71.1% expansion of net losses for Zhongchi Chefu in the 2023 fiscal year to $10.549 million. It is worth noting that the growth in total operating expenses is mainly due to expenses related to the listing, bad debt provision, and increased research and development expenditures. In the 2023 fiscal year, bad debts surged by 811.5% to $2.452 million.

"Overwhelmed" in Intense Competition

From the analysis above, it is evident that despite spending over a decade building an ecosystem through the S2B2C full-process supply chain digital service business model that has connected many players in the automotive industry chain, Zhongchi Chefu has not yet achieved profitability due to intense market competition. Several indicators suggest that it is "overwhelmed" in the intense competition.

In addition to the severely constrained gross profit margin of only a few tenths of a percent, Zhongchi Chefu's operating cash flow continues to be negative. According to the prospectus, in the 2022 and 2023 fiscal years, Zhongchi Chefu's net operating cash flows were -$4.864 million and -$7.281 million respectively. At the same time, sustained losses and cash outflows have led to a high level of debt for Zhongchi Chefu. As per the prospectus, as of the 12 months ending on September 30 in the 2023 fiscal year, Zhongchi Chefu's total assets were $19.035 million, total liabilities were $47.446 million, with a debt-to-asset ratio of nearly 250%. The cash on hand was only $2.12 million, indicating the urgency of Zhongchi Chefu's U.S. listing.

However, even if Zhongchi Chefu successfully completes its listing on the Nasdaq, while it may slightly ease the company's financial strain, the continued deterioration of the market environment will increase the pressure on Zhongchi Chefu, and its performance in the 2024 fiscal year may once again suffer.

Compared to 2023, the competition in China's automotive industry in 2024 has continued to intensify, entering a "white-hot" stage, with international luxury brands showing a clear decline. Apart from BBA taking turns to reduce prices, other high-end brands are also finding it difficult to escape. Taking the entry-level Macan from Porsche as an example, its starting price is 578,000 yuan, but the discounts offered by direct stores and dealerships are roughly between 11% to 19%, resulting in an actual discounted price of 450,000 to 500,000 yuan. Porsches priced below 500,000 yuan were previously unimaginable.

Behind the significant price cuts by Porsche is the sustained low sales volume in China. Data shows that Porsche's sales volume in China in 2023 was 79,283 units, a 15% year-on-year decline, making it the only sub-market globally with negative growth for the brand In the first quarter of 2024, Porsche's global sales volume was 77,640 units, a year-on-year decrease of 4%; however, in the Chinese market, Porsche only delivered 16,340 vehicles, a staggering 24% year-on-year decline. This indicates the intensity of market competition, with Porsche's significant price cuts in China just the "tip of the iceberg" of the downfall of international luxury brands in China. With the continuous rise of domestic luxury brands, this process may accelerate in the future, and domestic luxury brands may complete the "strangulation" of international luxury brands.

Parallel imported car sales are the core business of Zhongchi Chefu, which is also the company's strength. However, with the "concurrent decline in volume and price" of international luxury car brands in China in 2024, Zhongchi Chefu's parallel imported car business will face severe challenges. After all, this business recorded a 0% gross profit margin in the 2023 fiscal year, so there is a high possibility that this business will directly turn into a gross loss in the 2024 fiscal year, further expanding the company's losses.

Therefore, it is not surprising that Zhongchi Chefu frequently adjusts its fundraising amount, as the company faces various pressures such as low profitability, continuous losses, high debt levels, and intensifying competition and deterioration. This poses a significant challenge to the company's operations. Whether the company can adjust its business layout, seize the rapid rise trend of domestic brand cars, may be the key to whether Zhongchi Chefu can break out of the quagmire. Let's wait and see